China's Wen in Iceland, eyes on Arctic riches

REYKJAVIK (Reuters) - China signed accords on energy cooperation and the Arctic in Iceland on Friday as Premier Wen Jiabao started a tour of northern Europe that will focus on Chinese investment in a continent eager for funds and to trade with the rising world power.

Centrepiece of the trip will be a visit to Germany, where Wen and Chancellor Angela Merkel will on Sunday and Monday burnish industrial ties that have done much for both economies.

That the prime minister of the world's most populous nation should stop first, however, on a remote island of just 320,000 has raised hopes for an injection of Chinese cash into an economy ravaged by the bursting of a financial bubble in 2008 - but also suspicion of Beijing's hunger for natural resources.

A Chinese developer is fighting a government decision last year to bar him from buying a vast tract of land which some had suggested might be a cover for a possible future naval base and part of a wider strategy to gain a foothold in the region.

Over two days, Wen, who trained as a geologist, will see volcanic geysers and electricity plants where Iceland captures geothermal energy.

Friday's meetings between Wen and Icelandic Prime Minister Johanna Sigurdardottir resulted in agreements to cooperate in the Arctic region, in marine and polar science and in geothermal energy.

Orka Energy Ltd - an Icelandic firm focused on producing geothermal energy - and China's Sinopec Group also signed a deal to develop geothermal energy in China for heating houses and the production of electricity, though no figures were provided.

As well as Germany, where he will open the annual Hanover trade fair with Merkel on Sunday and visit carmaker Volkswagen on Monday, Wen will also go to Poland and to Sweden, where the Chinese-owned Volvo car plant is on the schedule for Tuesday.

Among discussions on investment and industrial projects - VW is expected to announce plans to build a new plant in China - the Chinese leader is also likely to hear pleas for Beijing to drop its resistance to Western efforts to impose U.N. sanctions on Syrian President Bashar al-Assad.

But by starting with a full-scale visit to Iceland, Wen has fuelled European concern that China might be trying to exploit the country's economic troubles to gain a strategic foothold in the North Atlantic and Arctic region.

The area has big reserves of oil, gas, gold, diamonds, zinc and iron. And with global warming melting polar ice, it may offer world powers new shipping routes - and naval interests - for the trade between Asia, Europe and America's east coast.

"When it comes to the Arctic, we always have China on our mind," said one European diplomat from the Nordic region, who spoke to Reuters this week on condition of anonymity.

ARCTIC FOOTHOLD?

Last year, Iceland's government rejected a plan by multi-millionaire Chinese developer Huang Nubo to build a sprawling tourist resort in the northeast corner of the chilly island, saying it did not meet legal requirements on foreign ownership.

A livid Huang, who went to university with Icelanders, said the decision revealed Western "hypocrisy" and that foreigners wrongly assumed Chinese firms had ties to China's military.

Huang is still pursuing the project and is in the midst of negotiating a new plan with Icelandic municipalities in which he would instead lease the property. People close to him say he may get a green light in weeks.

But conspiracy theories over why such an Asian giant would be interested in such a small nation abound.

"Given China's investment pattern around the globe, people have asked questions. Why are doing this? Is there some ulterior motive?" said Embla Eir Oddsdottir at the Stefansson Arctic Institute.

"For next decade they are going to be battling some sort of suspicion as to their motive, because people have a tendency to link them to some type of regime."

About a dozen protesters gathered outside the building in Reykjavik where the Chinese and Icelanders held their talks. When the then Chinese President Jiang Zemin visited a decade ago, several hundred Falun Gong and human rights activists staged protests.

Many had expected China to raise the issue of gaining observer status in the Arctic Council, which comprises Canada, Finland, Iceland, Norway, Russia, Sweden, the United States and Denmark, all of them nations with territory inside the Arctic Circle.

With ice receding faster than many had expected, some estimates suggest the polar ice cap might disappear completely during the summer season as soon as 2040, perhaps much earlier.

That could slash the journey time from Europe and the east coast of North America to Chinese and Japanese ports by well over a week, possibly taking traffic from the southern Suez Canal route.

"These are pretty big stakes," Oddsdottir of the Stefansson Institute in Iceland said. "I wonder if under the surface the race is already there, to gain a foothold in the Arctic."

TRADE, INVESTMENT

China has sought to assuage worries.

"China is willing to make contributions towards the peace, stability and sustainable development of the Arctic region, and it is on that basis that China seeks cooperation with Iceland," Chinese Vice Foreign Minister Song Tao told reporters this week.

Free trade negotiations were discussed earlier on Friday between Iceland's foreign minister and China's trade minister.

Iceland was the first European country to start free trade talks with China, though the process was suspended in 2009 as the crisis-hit nation applied to join the European Union.

Foreign Minister Ossur Skarphedinsson said a new round of talks should be held as soon as possible and that reductions in tariffs on fish be implemented immediately upon the signing of an agreement, or earlier.

In 2011, trade reached $151 million, up 35 percent on the year. China exports mostly coke, clothing, shoes, textiles and ships to Iceland, while Iceland exports mostly fish to China.

China also wants cooperate on geothermal power and other scientific research in fields such as the Northern Lights.

In Poland, a government official said Wen's visit may include discussions about Chinese interest in investing in roads, banks and the energy sector in a former Communist country which was growing faster than western Europe.

(Additional reporting by Ben Blanchard in Beijing, Erik Kirschbaum in Berlin and Alistair Scrutton in Stockholm; Editing by Alastair Macdonald)

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